Are trusts still relevant in South Africa?

What is a trust? How does it work?

A trust is a legal arrangement where assets are administered by a trustee on behalf and for the benefit of the beneficiaries of the trust. Ownership of the assets is relinquished to the trust.

Tax aside, trusts fulfil an important function in society.

Trusts are an ideal vehicle for assets to be administered on behalf of individuals who can’t do so themselves; for example, minors and handicapped individuals. Age-related issues can also diminish someone’s capacity. Trusts negate the need for such individuals to be placed under curatorship. Trustees have a fiduciary duty to ensure that the beneficiaries of the trust are properly looked after, even once the founder of the trust is no longer around.

Family trusts are flexible and can be amended to suit a family’s ever-changing needs as well as adapted to the changing global tax, legal and financial landscape.

There’s an adage that goes: “I want to leave my children enough money so that they can do anything, but not so much that they do nothing.”

Trusts are a useful succession planning tool that can protect beneficiaries, even against themselves if necessary. They allow the founder of the trust to build core values and principles into the trust documents. The trustees must always consider and adhere to these core values and principles when administering and distributing the assets to beneficiaries. These values and principles will continue to live on, even when the founder is no longer.

Trusts also allow for assets to be split between family members and are an efficient way to house complex assets. They also offer protection from creditors. Assets which belong to a trust are not subject to executors’ fees, which can be up to 3.5% (plus VAT) on the gross value of an estate.

How are trusts taxed?

According to EB Broomberg and Des Kruger, in Broomberg on Tax Strategy:

“The common assumption is that trusts are some kind of tax panacea...Then, conversely, from a South African Revenue Service (SARS) perspective, trusts are viewed with a degree of suspicion and mistrust. [T]he truth lies somewhere between these positions. Trusts are useful vehicles, but there is little tax magic that arises from the utilisation of a trust.”

Before deciding whether to keep your trust in South Africa, it is important to understand the following:

•  What are the reporting obligations for SA trusts?  
• How will a trust benefit my family? 
• Should the trustees elect to retain the trust, and a professional trustee is introduced, what fees should be taken into consideration? 

On the tax front, trusts still have their benefits, even if these benefits have been whittled away over the years. But is the juice worth the squeeze?

Tax benefits include estate duty and donations tax savings. Furthermore, the conduit principle allows income and capital gains generated in a trust to be taxed at an individual’s tax rate, which is generally lower than the rate at which a trust is taxed. Indeed the rate at which trusts are taxed has increased in recent years.

Terminating a trust also carries a tax and administrative cost. When a trust disposes of an asset to a beneficiary, it’s considered a disposal for capital gains tax purposes and could trigger a taxable capital gain. Any asset (along with its growth), that is distributed to a beneficiary, would now fall into the beneficiary’s estate for estate duty purposes.

Tax strategy

According to EB Broomberg and Des Kruger in Broomberg on Tax Strategy:

“The common assumption is that trusts are some kind of tax panacea...Then, conversely, from a South African Revenue Service (SARS) perspective, trusts are viewed with a degree of suspicion and mistrust. [T]he truth lies somewhere between these positions. Trusts are useful vehicles, but there is little tax magic that arises from the utilisation of a trust.”

Before deciding whether to keep your trust in South Africa, it is important to understand the following:

•  What are the reporting obligations for SA trusts?  
• How will a trust benefit my family? 
• Should the trustees elect to retain the trust, and a professional trustee is introduced, what fees should be taken into consideration? 

So, what do trustees need to think about? 

• The tax and administration costs of the trust. A professional independent trustee must be appointed to not only ensure compliance with the raft of changes that have been introduced to date, but also to ensure compliance with the trust deed.
• The tax benefits and estate duty savings the trust provides, versus the cost it carries. Fees (for professional trustees and administrators) can range between anything from R20,000 to R100,000 per trust, excl VAT, per annum, depending on the complexity of the trust.
• The commercial and emotional rationale for having a trust, which includes the significant benefits of the preservation of family wealth.  

“Should I keep my trust?” may seem like a straightforward question, but unfortunately it doesn’t have a straightforward answer. The answer to the question depends on the unique circumstances and dynamics of each family. 

Reporting obligations 

In certain instances, trustees, trust accountants and trust administrators are required to register as an “accountable institution” with the Financial Intelligence Centre (FIC). Some exemptions may apply; for example when dealing with testamentary trusts. It is advisable that, for a trust that is managed by the family unit itself, at least one of the trustees should be registered with the FIC as an accountable institution.

The deadline for such registration was 31 March 2023. It is imperative that those persons/organisations that have not yet registered with the FIC as accountable institutions do so as soon as possible. Once the registration of the relevant person / organisation has been completed, an anti-money laundering (AML) report should have been submitted to the FIC by 31 May 2023. 

Trustees are also required to register all of the beneficial owners of the trust. The report must be submitted to the Master of the High Court in a prescribed format.

Lastly, trustees of all SA trusts must also complete an IT3(t) report and submit this to SARS annually by September of each year, commencing September 2023. The IT3(t) report will contain prescribed information relating to trust distributions and their beneficiaries.  

Trustees who fail to comply with any of the above requirements can be fined up to R10 million or jailed for five years.